What happens if the ECB pulls a Swiss-style surprise

A prior version of this article incorrectly referenced China growth data. The story has been corrected.

Reuters

What have we learned over the past few days? There are the good surprises. Like the ones that come in a box with a ribbon, or a check from Taylor Swift to pay off your student loans. Or when your non-gifting husband gets you a Christmas present. Or a corporate earnings surprise to the upside. Happy, happy.

Then there are the other surprises. The kinds financial markets hate.

While you weren’t working on Monday, an official Chinese crackdown on margin lending — which one strategist called a “nasty surprise” — triggered a nearly 8% rout for the Shanghai Composite (though it’s back up today). And we all know what happened when the Swiss decided to pull the rug out from under markets. The Danes, meanwhile, surprised few by cutting deposit interest rates on Monday in a bid to keep their currency low ahead of expected ECB action.

That brings us to the next big potential surprise. In a Bloomberg survey from Monday, 93% of economists polled think Draghi and the gang will announce at least a 550 billion-euro ($640 billion) bond-buying program this week. “Draghi is on the hook to deliver, and expectations are high,” says Northman Trader.

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“Expectations are so high that no matter what they do, someone, somewhere, will not be happy.” says Sarhan Capital CEO Adam Sarhan. “ Investors in the U.S. are very focused on the ECB, because the eurozone is one of the largest trading partners for the U.S. and so many U.S. multi-nationals derive a large portion of their earnings from Europe.”

It matters on lots of levels, says Sarhan: for GDP growth in 2015 (U.S. and global economy), and for corporate earnings for the first quarter and the rest of 2015.

Most people don’t think a nasty surprise is on the way, but there are a few who do. Like IBankCoin’s The Fly who says in his blog: “The Europeans have a way to *&** things up, and right now everyone is relying on them to do something bold. The last time Europe did something bold was when Germany invaded Poland.”

The president of Germany’s Ifo Institute told CNBC on Monday that he expects deep market volatility on QE from the ECB.

There may be a not-so-silver lining to European stimulus, as well. Northman Trader says overseas capital has been flowing to the U.S., and if some of that decides to reallocate to a market with QE, then “it may be difficult, if not impossible, for U.S. markets to maintain gains.”

All these years of QE in the U.S. have fueled a bull market, but haven’t produced wage growth, and consumers don’t appear ready to drive revenue growth for companies, says Northman. If buybacks or growth can’t save the day in the months ahead, he says investors may have to take solace in the fact that there’s one more tool that managment can use to lift earnings: Layoffs. Another debate altogether, but read more in his full blog.

If ECB goes above and beyond, expect Wall Street to rally hard, says Sarge986’s Stephen Guilfoyle. If they disappoint, stocks will be hard and if they meet expectations, “sell on the news” mentality may hit markets anyway. In any case, expect volatility, he said.

As we have learned from the Swiss school of hard knocks, be ready for anything this week.

Key market gauges

Crude
US:CLG5
is angling to get back in the spotlight with a sharp tumble (though Brent
UK:LCOH5
is going the other direction) after disappointing Chinese economic-growth data. That GDP figure took down copper prices
US:HGH5
earlier, as China is a huge buyer of the metal. Gold
US:GCG5
is up nearly 1%.

And as markets get back to work, futures on the Dow
US:YMH5
and the S&P
US:ESH5
are up QE hopefulness, which is also spurring Europe stocks
SXXP, +0.03%
to multiyear highs. After Monday’s 7%-plus beat-down, the Shanghai Composite
SHCOMP, +0.06%
has regained its composure and bounced back. The Nikkei 225 index
NIK, -0.33%
rose 2%. The dollar
USDJPY, +0.01%
shot past ¥118, as safe-haven bids for the yen were peeled back.

The quote of the day

“I just thought that price should not be there. I know that there is a simpler way to do this.” 13-year old builds a Braille printer out of Legos. after finding regular printers cost at least $2,000. If that doesn’t inspire you....

The economy

A home builders’ index is coming at 10 a.m., and then President Obama will make his State of the Union address later. And we are less pessimistic.

Outside of that, China’s economy grew 7.4% in 2014, beating market expectations, but that’s also the weakest level in nearly a quarter of a century. The IMF slashed growth for a whole bunch of countries, including China. On a Fed note, WSJ’s Hilsenrath says the U.S. central bank is on course for mid-year rate hikes.

Earnings

More than 50 S&P 500 firms are reporting this week. Baker Hughes
US:BHI
said profit and revenue rose in the December quarter, but warned its 2015 results would likely suffer from the oil-price slump.

Morgan Stanley
MS, -0.59%
has disappointed on profit and revenue and shares are responding accordingly. Delta Air
DAL, +0.37%
had better news to report and shares are up, along with Halliburton
HAL, -0.11%
Johnson & Johnson
JNJ, -0.18%
earnings inched right ahead of expectations. IBM
IBM, +0.47%
and Netflix
NFLX, +0.46%
will report after the close. Speaking of Netflix, catch “Bleak House” while you can.

The buzz

Twitter
TWTR, -2.30%
is buying Indian mobile-marketing company ZipDial for an undisclosed sum. The purchase will “make Twitter even more accessible to people around the world,” Twitter said.

FXCM
US:FXCM
is getting crushed again, down 80%-plus and trading around 1/14 of its IPO price.The company provided further details on its $300 million rescue package from Leucadia National after the broker got hit hard by that Swiss move.

The late Steve Jobs once said that if you see a stylus, “they blew it.” Oh, well — that was then, this is now. Apple
AAPL, +1.72%
is reportedly gearing up to launch a stylus to accompany a bigger iPad, says Apple Insider. And 3D handwriting may not be far off.

Big money managers, led by Fidelity Investments, plan to launch a dark pool. That basically would let them buy and sell large blocks of stock without Wall Street firms or high-speed traders getting in on the act, says the WSJ. Pooling together are BlackRock
BLK, -0.74%
Bank of New York Mellon
BK, -0.15%
J.P. Morgan Chase
JPM, -0.45%
and T. Rowe Price
TROW, -0.87%

The chart of the day

In a note entitled “The deflationary vortex of a shrinking dollar economy,” Societe Generale’s global head of economics Michala Marcussen lays some worries down. She sees a risk to the dollar economy (world GDP measured in U.S. dollars), as the ECB looks set to export deflation with more easing.. The dollar economy is down by just over 5% since July, a loss of over $4 trillion in nominal terms. The last big drop was in 2008, when the economy shrank by over $7 trillion, for a loss of more than 10%.

In short, if central-bank accommodation and lower commodity prices don’t sufficiently boost GDP and inflation elsewhere in the world, the dollar economy is going to shrink further. This is a fundamental downside risk, she says. A shrinking dollar economy is also a headwind for corporate earnings.

SocGen

The call of the day

It’s looking rough for TV-network owners, but that’s good for companies like Time Warner
TWX, -0.28%
and Netflix. Tom Wible and Murali Sanker over at Janney say 2015 is going to be volatile due to a weak ad market, a slowdown in video-programming service subscriptions, and content cost that’s going to weigh on earnings. Economic uncertainty and foreign exchange headwinds don’t help, either.

Janney analysts say younger viewers’ interest is clustered around three kinds of content: sports, HBO and broadcast. They say buy Netflix, which benefits from being a “disrupter” and is ranked top by that younger audience. Plus it has a big content budget and global scale that makes it tough to challenge. And buy the hedge —Time Warner — because it has ample opportunity to grow if the industry keeps the status quo, but more than any of its peers is able to offset content cannibalization with some incremental HBO revenue, they say.

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